Shopping for Information: Implications of Consumer Learning for Optimal Pricing and Product Design* |
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Authors: | Marilyn Pease |
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Institution: | Kelley School of Business, Department of Business Economics and Public Policy, Indiana University, Bloomington, Indiana, U.S.A |
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Abstract: | I study a seller's pricing problem where consumers perform costly product research about value before purchase. They buy the product when sufficiently optimistic about value and cease research when sufficiently pessimistic. I find that the seller encourages product research when prior belief about value is high, even though he could sell immediately for a high price. The prior affects both expected value and how additional information changes consumers' beliefs. I show that an increase in research cost affects equilibrium price nonmonotonically. Finally, when the seller chooses price and product value dispersion, the optimal level of dispersion need not be extremal. |
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